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Weakness Under the Surface...

10/22/2010 9:10:47 AM

The Russell-2000 and Semiconductor Indexes lead the markets lower after a gap up open. This isn't bullish behavior.

Take no action.

Daily Trend Indications:

Daily Trend Indications

- Positions indicated as Green are Long positions and those indicated as Red are short positions.

- The State of the Market is used to determine how you should trade. A trending market can ignore support and resistance levels and maintain its direction longer than most traders think it will.

- The BIAS is used to determine how aggressive or defensive you should be with a position. If the BIAS is Bullish but the market is in a Trading state, you might enter a short trade to take advantage of a reversal off of resistance. The BIAS tells you to exit that trade on "weaker" signals than you might otherwise trade on as the market is predisposed to move in the direction of BIAS.

- At Risk is generally neutral represented by "-". When it is "Bullish" or "Bearish" it warns of a potential change in the BIAS.

- The Moving Averages are noted as they are important signposts used by the Chartists community in determining the relative health of the markets.

Current ETF positions are:
Short DIA at $108.57
Short QQQQ at $49.66
Short SPY at $114.82

Daily Trading Action

The major index ETFs opened higher and rose in the first forty-five minutes of the session before chopping around for the next forty-five minutes. From 11:00am, the major indexes took a swan dive down which lasted for three hours moving into negative territory before beginning to rally with two hours left in the session. The rally was impressive until it reached the final hour when it leveled off with fractional gains and volume dropped off to almost imperceptible. The final fifteen minutes usually see the heaviest trading of the session but not on Thursday (THIS WAS MARKEDLY STRANGE). The Russell-2000 (IWM 69.87 -0.34) posted a fractional loss as did the Semiconductor Index (SOX 349.86 -1.92) closing just below its 200-Day Moving Average (DMA). The bank indexes were mostly unchanged with the Bank Index (KBE 22.77 +0.5) moving up as much as the Regional Bank Index (KRE 23.14 -0.05) moved lower. The 20+ Yr Bonds (TLT 100.70 -1.21) lost more than one percent as it struggles not far above its recent intraday low at $99.90. NYSE volume was average with 1.054B shares traded. NASDAQ volume was average with 2.137B shares traded.

There were four economic reports of interest released:

  • Initial Jobless Claims for last week came in at 452K versus an expected 455K
  • Continuing Jobless Claims came in at 4.441M versus an expected 4.400M
  • Leading Economic Indicators (Sep) rose 0.3% as expected
  • Philadelphia Fed Index (Oct) came in at 1.0 versus an expected 1.4

The first two reports were released one hour before the open. The latter two reports were released a half hour after the open.

A falling U.S. dollar supported a higher open for equities. A rise in the dollar during the regular session helped fuel losses for the major indexes as all dipped into negative territory intraday with a rally in equities corresponding with the formal close of the U.S. dollar currency trading and fall off in the value of the U.S. dollar.

Six out of ten economic sectors in the S&P-500 moved higher led by Consumer Discretionary (+0.7%). Telecom (-0.5%), Utilities (-0.5%), Financials (-0.2%), and Energy (-0.1%) moved lower.

Implied volatility for the S&P-500 (VIX 19.27 -0.52) fell two and a half percent as did implied volatility for the NASDAQ-100 (VXN 21.18 -0.47).

The yield for the 10-year note rose six basis points to close at 2.53. The price of the near term futures contract for a barrel of crude oil fell $1.98 to close at $80.56.

Market internals were mixed with decliners leading advancers 11:10 on the NYSE and by 8:5 on the NASDAQ. Down volume led up volume 6:5 on the NYSE while up volume edged down volume by one percent on the NASDAQ. The index put/call ratio fell 0.27 to close at 1.29. The equity put/call ratio rose 0.03 to close at 0.72.


Thursday saw the bulls push the major indexes to new intraday highs with a corresponding drubbing following that action. The market internals were mixed but mostly negative with leadership lower focused on the "risk trade" coming off. That is, the Russell-2000 and the Semiconductor Indexed ended lower and led the major indexes to move lower through the session. However, a fly in the ointment of the bearish scenario were long-term bonds. Long term bonds looked like they were going to move higher in price when the U.S. dollar was rising but eventually gave up those dreams to move more than one percent lower.

It is hard to ignore the 80% inverse correlation of equities to moves of the U.S. dollar. The crowded trade at this time is to be bearish on the U.S. dollar. We have seen these crowded trades take awhile to unwind in the past, but when they do there is a stampede for the exits and the dollar will eventually be no different. The question is when. Until the dollar decides to break higher, equities may continue to catch a bid.

Looking at the trading action, we are once again at a critical juncture where equities need to move sharply lower or the bulls will be able to keep slowly marching the major indexes higher. It appears the bulls will attempt to move the major indexes higher again on Friday but it is unclear whether the bears will meet that attempt with a significant counterattack. Underlying trade was actually bearish on Thursday even though the major indexes moved higher. It won't take much of a catalyst to derail this move, but it hasn't happened yet.

In terms of the scenarios that we outlined as possibilities, we really received all three. We had the bulls testing to new highs and then being rejected by the bears but the move lower, although the major indexes moved into negative territory, ended with the major indexes closing below former intraday highs but it was still a positive close for the major indexes. We will have to see if the bears are willing to resist the bullish attempt on Friday or if the behavior will become dominated by the bulls and we will have to relinquish our short position. This battle could go on through Monday with a final roll-over on turnaround Tuesday. Stay tuned.

We hope you have enjoyed this edition of the McMillan portfolio. You may send comments to mark@stockbarometer.com.


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